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Global trade’s rebalancing act

Jul 11,2018 - Last updated at Jul 11,2018

Henry Kissinger once observed that “peace can be achieved only by hegemony or by balance of power.” The same principle applies to trade. It’s no accident that the two greatest periods of globalisation, the decades leading up to World War I and the decades after World War II, were characterised by balance of power and hegemony, respectively. 

And yet, trade requires more than the absence of conflict. Global trade demands clear rules, typically enforced by a hegemon. For decades that role was played by the United States. But as President Donald Trump embraces a more protectionist approach, the era of American primacy is coming to an end. New leadership is needed, but where will it come from?

Europe, for one. The European Union, as one of the world’s largest economies and a key defender of liberal values, can ensure that US hegemony is replaced by a peaceful and prosperous balance of power. To do that, however, the EU must first get its own house in order.

If the EU is to fill America’s shoes, its leaders will need to address populist trends and implement more sensible border and immigration policies.

Europe’s governments must also assume greater responsibility for the bloc’s security, from military threats to cyber attacks. And, critically, the EU must strengthen its financial footing. A single European financial market without a credible banking resolution mechanism will always be prone to crisis, the sharing of obligations must be made a high priority.

But perhaps the most important thing the EU can do in the short term is to make it clear to the US that the days of American dominance are over.

Leading on trade should come easy to a continent that excels at maintaining free and open economic ties. That said, European leaders will need to demonstrate a high degree of toughness, pragmatism, and diplomatic skill. Above all, the EU must lead by example. One place to start would be by doing away with remaining external tariffs, a largely symbolic move that would nonetheless reinforce the crucial point that trade is not a zero-sum game.

With the US in retreat and China ascendant, the transition from a hegemonic global order to one with more balance is already under way. Kissinger was right; peace does have a formula. So does effective global trade. And when a key variable in the equation goes missing, new ones must be found to replace it.


Larry Hatheway is head of investment solutions and group chief economist at GAM. Copyright: Project Syndicate, 2018.

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